The Coronavirus Aid, Relief and Economic Security Act (CARES Act) created an employee retention tax credit, which is designed to encourage eligible employers to keep employees on their payroll, despite experiencing economic hardship related to COVID-19.
Enacted on December 27, 2020, the Taxpayer Certainty and Disaster Tax Relief Act made a number of changes to the CARES Act employee retention tax credit, including modifying and extending the Employee Retention Credit (ERC), for six months through June 30, 2021.
The employee retention credit is a fully refundable tax credit (against the employer share of Social Security) equal to 70 percent of up to $10,000 in qualified wages paid to employees between January 1-June 30, 2021. The maximum credit for qualified wages paid to any employee is $7,000 per quarter for a total of $14,000 in 2021.
Jason Eisenhut (pictured right), VP of Human Resources at Employco USA, Inc., recently wrote a blog to answer some questions about these credits:
- Does my business qualify to receive the Employee Retention Credit?
Eligible employers are those that carry on a trade or business in the first six months of 2021 and experience either:
1. A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or
2. A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80 percent of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020 the gross receipts were required to be less than 50 percent).
- How is the credit calculated?
The amount of the credit is 70 percent of qualifying 2021 wages paid up to $10,000 in total per quarter. Wages taken into account are not limited to cash payments, but also include a portion of the cost of employer provided health care. Starting this year, the maximum credit has been increased to $7,000 per employee for each of the first two quarters of 2021 ($10,000 in qualified wages x 70 percent) for a possible $14,000 credit per employee.
- How do I know which wages qualify?
Qualifying wages are based on the average number of a business’s employees in 2019.
• For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.
• For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.
- How does this affect the PPP?
Employers that receive a Payroll Protection Program loan are no longer prohibited from claiming the ERC. However, the ERC may not be claimed for wages paid with the proceeds of a PPP loan that have been forgiven.
- I am an eligible employer. How do I receive my credit?
The Internal Revenue Service issued news releases that provided the following guidance:
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers.
Employers can access the ERC for the first and second quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits. Small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit (subject to certain limits) on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. In 2021, advances are not available for employers larger than this.
If you have any questions or concerns, contact Jason Eisenhut, (630) 286-7341 or firstname.lastname@example.org.